U.S. Sovereign Default Swaps Jump Most Since 2009 on Budget Woes

Credit-default swaps on U.S. Treasuries jumped by the most since November 2009 as the government remained partially shut for a third day.

Swaps rose as much as 11.5 basis points to 44 basis points, the highest since Jan. 24, according to data compiled by Bloomberg. That compares with a four-year low of 21 basis points last month and a peak of 65 basis points in 2011, the last time Congress played brinkmanship over the nation’s debt limit.

“The market is alerted rather than alarmed,” said Richard McGuire, an analyst at Rabobank International in London. “Given where CDS levels are, it’s possibly not yet pricing in a serious likelihood they will go over the brink. The longer this continues, the greater the likelihood that even the unthinkable will have to be thought.”

Lawmakers have to agree to raise the $16.7 trillion debt ceiling by Oct. 17 so the nation can continue to meet its commitments. President Barack Obama and congressional leaders have failed to break a budget impasse, triggering the first government shutdown in 17 years.

Swaps on Treasuries were the 15th most traded of 1,000 entities tracked by the Depository Trust & Clearing Corp. in the week through Sept. 27, up from 147th the previous period.

There were 56 trades covering a gross $2.1 billion of Treasuries, compared with 10 trades covering $290 million the previous week, according to DTCC, which runs a central registry for the market.

The amount of Treasuries protected also increased, DTCC data show. There are now 886 contracts covering a net $3.4 billion of debt outstanding, the most since March and up from an almost three-year low of $3.1 billion on Sept. 20. The 8 percent increase is the biggest since June 2011.

That compares with $13.1 billion of protection on German bunds and $16.9 billion on Italy’s debt.

“Complacency has clearly been shaken now to some degree,” said McGuire. “The system lends itself to eleventh-hour negotiations and stop-gap solutions.”

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